McDonald’s Roars On, Despite Malaise

The global economic mess has been surprisingly kind to McDonald’s (MCD), the world’s largest restaurant chain. Weak economies have consumers searching for cheaper dining options when they choose to eat out, and the golden arches are a perfect fit.

The company’s huge scale gives it leverage with vendors, many of whom are dependent on the company for the bulk of their revenue. That helps keep its raw materials costs, including food, at reasonable levels.

The brand exudes strength. McDonald’s restaurants generate average annual sales of more than $2.4 million each compared to an average of about $1 million for other fast food restaurants, according to Morningstar data.

The company’s $687 billion advertising budget leaves a lot of McDonald’s jingles implanted in consumers’ brains. McDonald’s also does a good job of adding new products. On the beverage side, the company introduced its McCafe line of coffees in 2009 and fruit smoothies in 2010. Both have performed well. In the second quarter, U.S. McCafe sales soared 29 percent from a year earlier.

On the food side, McDonald’s has experienced success with the addition of Angus beef burgers, snack wraps, and Southern-style chicken offerings.

Wonders of franchising

About 80 percent of McDonald’s restaurants are franchised. That means the company garners regular rent and royalty payments in good times and bad. It also lowers McDonald’s need for capital spending.

The stock has rewarded investors big time over the past five years, with an annual total return of 21.4 percent. Profit surged 15 percent in the second quarter from a year earlier to $1.41 billion. Revenue jumped 16 percent to $6.91 billion.

Standard & Poor’s analyst Jim Yin has a four-star buy rating on McDonald’s shares. “Although we are concerned about a slowdown in the global economy, we believe consumers are still willing to make small discretionary purchases,” he writes.

“We see significant growth opportunities in international markets, in particular in Asia Pacific, the Middle East and Africa . . . Although food input costs have been rising, we see less price appreciation in the second half of 2011.” The company next reports around Oct. 20.

The global economic mess has been surprisingly kind to McDonald s (MCD), the world s largest restaurant chain. Weak economies have consumers searching for cheaper dining options when they choose to eat out, and the golden arches are a perfect fit.
The company s huge scale...